October 31, 2020

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5 Stocks to Sell or Stay Away From in October

The stock market has been raging with volatility as various market sectors have responded differently...

The stock market has been raging with volatility as various market sectors have responded differently to the brief economic recession.

As the economy tries to kick into recovery mode, some companies may take longer than others to improve their financial health. In the meantime, this can impact your equity exposure.

Consumer behaviors are evolving and businesses will need to adapt to these changes. Industries that depend on human interaction – such as travel, leisure and entertainment – need to show flexibility, or they risk being left behind. Here are five stocks to sell or stay away from this month:

  • AMC Entertainment Holding (ticker: AMC)
  • Ambev S.A. ADR (ABEV)
  • Lyft (LYFT)
  • Carnival Corp. (CCL)
  • American Airlines (AAL)

AMC Entertainment Holding (AMC)

AMC temporarily suspended its global operations in mid-March and remained closed through the second quarter ending June 30, with little to no revenue coming in. Although some AMC theaters started to reopen in August, the company’s financials look grim. Revenues in the second quarter were $18.9 million, a 98.7% decline from $1.5 billion during the same time last year.

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Also, the company’s diluted earnings per share in the second quarter was in the red, at a loss of $5.44 per share, compared with $2.22 for the first quarter of this year. When describing the results of the latest quarter, AMC’s CEO and president, Adam Aron, said, “This was the most challenging quarter in the 100-year history of AMC.”

The company’s main focus is to manage its liquidity. AMC has suspended dividends and shareholder cash returns. On Sept. 24, AMC entered into an equity distribution agreement with Citigroup and Goldman Sachs to sell up to 15 million shares of common stock. The company plans to put any of the profits gained from this equity financing toward increasing its capital position, according to the company’s 8-K filing.

AMC also started to sell some of its locations internationally to address its monthly cash burn and need for liquidity.

Blockbuster movie releases like “Black Widow,” “Ghostbuster: Afterlife” and “West Side Story,” which were scheduled to debut in 2020, are delayed until 2021. These delays will prevent large audiences at cinemas, impacting AMC’s admission sales. AMC stock is down 35% year to date at its current market value of $4.65 per share, as of Oct. 1.

Ambev S.A. ADR (ABEV)

Ambev, a Brazilian brewing company that merged with Anheuser-Busch InBev, produces and sells beer as well as nonalcoholic beverages. Its business is focused predominantly in Latin America and Canada, and it hasn’t been performing well.

Following ABEV’s price peak at around $9 per share in 2013, the stock began a long, bumpy descent. The stock is down 52% year to date and currently sits at around $2.26. Its low price doesn’t make the penny stock attractive for a couple of reasons.

ABEV’s low market value has been driven by corruption allegations and weak financials. Despite Ambev denying allegations of making payments to two former Brazilian presidents to preclude higher taxes on beverages, the company has roughed up its reputation.

In the first quarter of 2020, Ambev’s net revenue was down 1.6%, but the business saw a larger drop of 10.4% for net revenues in the second quarter. The company claims that changes in consumer behavior such as a reduction in household expenditures along with disruptions to Ambev’s trade channels to other countries due to the health crisis resulted in a hard blow to its profits.

Lyft (LYFT)

Although Lyft saw a 23% increase in revenue in the first quarter to $955.7 million, there has been a sharp decline in demand for ride sharing since the pandemic hit. This decline was more evident in Lyft’s second-quarter results, with a 61% decrease in the company’s revenue from $867.3 million a year ago to $339.3 million.

Long-term investors should be aware that in addition to Lyft experiencing revenue loss, it’s not even a profitable company yet. Besides, since going public in March 2019, LYFT has seen steady declines in its share price. LYFT shares are down more than 30% year to date, closing at $27.81 yesterday. Compare that to its stock market debut, when it opened at $87.24 a share.

As unemployment has become a reality for millions in the U.S., gig workers have been advocating to be employees of companies like Lyft and Uber (UBER) to take advantage of unemployment benefits, while ride-sharing business claim drivers are simply independent contractors. This labor regulatory pressure has made Lyft a subject of law disputes in California that could mean complications to their services.

Carnival Corp. (CCL)

The pandemic has brought Carnival’s business to a standstill. In March 2020, the company decided to halt global fleet cruise operations with no indication of when they’ll return. Following this, bookings declined and are expected to decline further for the remainder of 2020, impacting CCL’s profitability and liquidity.

Looking at the company’s third-quarter results can put Carnival’s 2020 corporate losses into perspective. CCL saw a $2.9 billion net loss in its most recent quarter. The company estimated cash burn for the second half of 2020 to be $650 million in June, but in September, the company’s monthly cash burn rate was $770 million.

P&O Cruises, a British cruise line operated by Carnival, announced in mid-September that it will halt operations and cancel sailings until early 2021 as travel restrictions persist, according to a news release. Carnival has also canceled cruises from most of its U.S. ports for November and December 2020.

CCL stock is down 70% year to date, at $15.03 as of yesterday, and is showing no signs of recovery anytime soon.

American Airlines (AAL)

“This was one of the most challenging quarters in American’s history,” said American Airlines chairman and CEO Doug Parker in a company earnings report in July.

In its most recent quarter, American Airlines reported a net loss of $2.1 billion, or a $4.82 loss per share. The company has faced liquidity challenges and has been pressing for more federal aid to prevent job losses and furloughs and to ultimately stay afloat.

In the week ending Sept. 20, domestic air travel was down 66%, while international travel was down 84%, according to Airlines for America, as the threats of the health crisis are top of mind for travelers. The airline industry was the hardest hit by the pandemic. With businesses adapting to conducting meetings at home, it brings into question whether airlines will see similar pre-pandemic travel demands once the pandemic ends.

The U.S. airline industry received a $25 billion aid package from the government earlier this year that expired Oct. 1. More aid is included for airlines in the COVID-19 relief effort, but the package is falling through in Congress. At the time of this writing, AAL plans to begin furloughing 19,000 jobs.

Year-to-date, AAL shares have fallen by more than 50%.

Copyright 2020 U.S. News & World Report

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